US consumer confidence is sinking, weighed down by high energy prices and the downturn in the housing market. In a quiet week for data releases, a further decline is expected in US consumer confidence data for December, due on Thursday. The consensus forecast is for a fall from 87.3 in November to 86.8 but the risk is for a larger decline as confidence sinks towards the trough reached in the aftermath of Hurricane Katrina and the resulting devastation in New Orleans.

US household spending has held up well in spite of the deterioration in consumer confidence, largely due to continued expansion in the US labour market. Non-farm payrolls have increased by 1.3m in the first 11 months of 2007 but employment gains this year are set to be the weakest since 2003.

A key question for investors in 2008 is whether the US labour market can continue to create jobs, providing vital support for consumer spending and allowing the economy to escape recession.

However, Han de Jong, chief economist at ABN Amro, is concerned that a self-reinforcing vicious spiral is developing between financial markets and the real economy.

Mr De Jong says reduced availability of credit will weaken demand for assets and affect house prices. As well as intensifying problems in financial markets, particularly for mortgage-backed securities, this will weaken household's finances and lead to softer consumer demand. "This is the decisive factor that will push the economy into recession," says Mr De Jong.

Two factors that could help the US escape recession are improving export growth and investment. But as growth in corporate profits slows, investment spending is also likely to weaken.

Some evidence of this may come with durable goods orders data for November, also due on Thursday. Higher aircraft orders are boosting the headline measure with year-on-year growth expected to rise from 5 per cent in October to 5.7 per cent in November. However, the year-on-year trend in the core measure, non-defence capital goods excluding aircraft, is much weaker, falling in nine out of 10 months so far in 2007.

Friday will bring a reminder of the ongoing problems in the US housing market with new home sales data. After a rebound to 728,000 in October, a fall to 720,000 is expected in November, but there have been some encouraging signs of a stabilisation in new home sales in some regions.

In the UK, the Nationwide Building Society's survey showed house prices falling in November for the first time in the current cycle and a further decline is likely in December. The-year-on-year growth rate is forecast to slow from 6.9 per cent to 5.3 per cent and a further deceleration is widely expected next year.